WEAKNESSES

High share of agriculture in employment and GDP makes the economy vulnerable to weather conditions

Underdeveloped electricity and transport networks

Lack of skilled workforce

Dependent on concessional finance due to weak fiscal resources

Significant governance shortcomings, high levels of corruption

Poverty rate still high; low levels of spending on health and education

RISK ASSESSMENT

Slight slowdown in growth in 2020

Growth is expected to decline slightly in 2020 as exports (55% of GDP) growth shrink on slower global demand. Robust economic growth should continue to benefit from strong domestic demand supported by public spending, investment growth and tourism. Public investment will focus mainly on education, agriculture and infrastructure. Private investment, which is higher than public investment, will continue to benefit from Chinese projects in the country, particularly through PPPs. However, large inflows of foreign capital may not be sustained, especially in a context of increasing global uncertainty, a slowdown in China and uncertain access to the European market. The EU is the destination for 40% of Cambodia's exports, mainly clothing, footwear and bicycles. Accordingly, the loss of Everything But Arms (EBA) preferences, which currently allow Cambodia to access the EU duty- and quota-free, is likely to lead to slower exports and growth. With private consumption accounting for 75% of GDP, household disposable income will increase, particularly for workers in the textile sector. The construction sector will also contribute to growth, thanks to Chinese investments, the rise of the real estate market and the development of tourism infrastructure. The service sector will continue to expand, thanks in particular to strong growth in the tourism sector (20% of GDP). The casino gambling industry will face tough times due to the ban imposed on online gambling under pressure from the Chinese government.

The banking sector remains fragile

Credit continues to grow rapidly, particularly in real estate and construction. The banking sector remains fragile due to inadequate supervision and risk concentration in the real estate sector. In addition, the economy is highly dollarized, with foreign currencies accounting for almost all deposits, which exposes banks to significant currency risks. The budget deficit is expected to deteroriate due to higher spending with 2.5% of GDP in 2020 in additional spending to support job creation, human capital development and investment in infrastructure. This increase in spending will not be offset by revenue growth linked to the strength of the economy and gradual improvements in tax collection. Nevertheless the public debt burden will decrease. Almost entirely held abroad (half of it is owed to China) and denominated in foreign currencies, the public debt will remain sustainable in 2020. The current account deficit should increase slightly in connection with a difficult global context. The growth in tourism will contribute to maintaining a surplus in services (4.6% of GDP). High levels of international aid and remittances (7% of GDP) will offset the repatriation of dividends by foreign companies (5.6% of GDP). Regular FDI inflows (12.6% of GDP), particularly from China and Japan, will make it possible to finance the current account deficit and thus support the currency, which is in a flexible exchange rate regime. Foreign exchange reserves are sufficient, covering about six months of imports, or almost the entire amount of external debt.

Change of diplomatic direction

Relations with traditional Western partners, including the EU and the United States, have deteriorated since national elections in 2018, which featured irregularities and drew international criticism for the repression of political opposition and local media. In February, the EU launched an 18-month review of Cambodia's preferential access to the European market under its Everything But Arms (EBA) programme. This poses a significant risk to the Cambodian economy, which shipped 40% of its exports to European markets in 2018. More than 90% of these goods were granted tax-free access under the EBA programme.

The United States has also threatened to impose sanctions on Cambodian government officials and to withdraw the preferential trade agreements granted to Cambodia. In response, Cambodia has redoubled efforts to strengthen its ties to China, which has become its main trading partner and ally in international affairs. Cambodia has also launched a broader campaign to diversify its diplomatic network by reaching out to various small and medium-sized powers, many of which face the same Western pressures for democracy and human rights.

Corruption and arrests of opponents will remain a concern, despite Prime Minister Hun Sen's announcements of reforms to fight corruption and build strong institutions and a resilient and inclusive society.